Political u-turns

Despite the title of today’s article, I will not be opining on the current political state of affairs or political u-turns either in Malta or internationally. I will instead continue to cover topics of interest across local and international capital markets.

Since the first week of April, international capital markets experienced one of the most volatile periods after US President Donald Trump announced the imposition of a new tariff policy on 2 April in what he referred to as ‘Liberation Day’.

Most media outlets have been giving ample coverage to the tariffs being imposed by the new US administration. It is worth highlighting that a tariff is essentially a tax imposed on imported goods into a country. The main rationale for the implementation of a tariff is to shield certain industries from foreign competition and therefore to sustain or create domestic employment. The US President has been repeatedly explaining that his aim is to boost the manufacturing sector by urging several major companies to shift their production facilities back to the US.

Among the many articles published on the subject matter over recent weeks, one specific article mentioned that from an analysis of the revenue generated by the companies forming part of the S&P 500 index in the US, over 40 per cent of aggregate revenues originate from outside the US. Given this sizeable amount, the new policies being adopted by President Trump represent a sizeable risk for the largest and most successful US manufacturers and exporters.

From 1 April, the day before the famous press conference by President Trump detailing the high-than-expected increase in tariffs being imposed by the US on a wide range of countries, until 8 April the S&P 500 index in the US and the Nasdaq plunged by 11.2 per cent and 11.7 per cent respectively. As a result of the sharp downturn in a few days, the S&P 500 index was about to enter bear market territory (a decline of 20 per cent from the recent all-time high of 19 February) while the tech-focused Nasdaq had slumped by over 24 per cent from its record level on 16 December 2024.

However, on Wednesday 9 April, President Trump implemented a three-month pause on the imposition of the “reciprocal tariffs” on countries that had not responded with import levies of their own. This was described as one of the biggest economic policy u-turns in modern presidential history which sparked a big rally in US equity indices. In fact, the S&P 500 soared by more than nine per cent that day with this ranking as the third-largest daily gain since World War II.

The reprieve was granted to all countries with the exception of China where additional tariffs were imposed after a retaliation by the Chinese in what has clearly become a full-blown trade war between these major economies.

While most investors have undoubtedly been seeing the main media portals reporting the volatile movements across the main indices and the share prices of some of the largest companies in the US such as Apple, Microsoft and Nvidia, the real news and possibly one of the determining factors behind the decision to delay the implementation of tariffs was the reaction in the bond market.

In past crashes experienced across stockmarkets (1987, 1997, 2001 and 2008), bond prices mostly rose (and yields fell) while equities dropped heavily.

US government bonds referred to as ‘Treasuries’ play a very important role in the global financial system and are seen as a safe haven amid geopolitical or financial market uncertainty. Although US Treasuries initially performed as expected when equity markets started plunging in early April 2025 just after ‘Liberation Day, bond prices suddenly switched direction indicating a strain on the most liquid safe haven also in view of weak demand for an auction of three-year Treasury bonds on Tuesday 8 April.

The bond market sell-off escalated last Friday 11 April with the 10-year US Treasury yield surging to its highest level since February to a high of 4.59 per cent, representing a very large reversal of 72 basis points from a low of 3.87 per cent on Monday 7th April.

This ranks as one of the largest weekly moves in the US bond market since November 2001.⁠ Similarly, the 30-year US Treasury yield climbed towards a level of 4.88 per cent — the highest level since January and the biggest weekly surge for the 30-year yield since 1982.⁠

The spike in medium and long-term US bond yields bond is raising the cost of new borrowing requirements by the US government ultimately resulting in a significant spike in debt servicing costs to what some economists refer to as ‘unsustainable levels’. In fact, it is estimated that almost 40 per cent of the USD36 trillion in the US national debt must be refinanced in the near-term. Debt issued at very low rates during the exceptional period of historically low interest rates some years ago will soon mature and unless yields decline from current levels, the US will be forced to refinance these US Treasury bonds at dramatically higher rates of interest.

Apart from the sharp rise in yields (lower prices of US Treasures), the US Dollar also  plunged against most major currencies over the past couple of weeks in what is another worrying signal for investors.

Meanwhile, over the weekend, in what can be seen as yet another policy u-turn, the Trump administration announced an exemption from reciprocal tariffs for smartphones, semiconductor chips and other electronics. Once again, according to exponents of the White House, this is meant to give companies the time to move their production facilities to the US. The move was viewed as a very positive development for some of the technology companies, including Apple, which manufacture many products in China.

However, only a few hours after this announcement, US commerce secretary Howard Lutnick elaborated by saying that said such products would be exempt from the reciprocal tariffs but will be included in the semiconductor tariffs once these come into force in the next few weeks. This uncertainty could lead to a threat to supply chains while pricing power of several companies remains unresolved.

The most recent announcements over the weekend provide yet again a clear example of the highly unpredictable methods of the new US administration. The erratic leadership style of the US President is leading to a high level of uncertainty for the stock market and the economy essentially endangering the bond market and also the US Dollar.

A high-ranking banking official in the EU commented that the movements seen over recent days point to a complete loss of faith in the strongest bond market in the world. A number of the world’s largest institutional investors and pension funds are reportedly reassessing their investments into the US until the country stabilises after the erratic policy measures over recent weeks.

Meanwhile, some analysts described the concurrent declines in US equity indices and government bond prices as a clear indication of “a radical shift away from US assets” and the “end of American economic exceptionalism”

Read more of Mr Rizzo’s insights at Rizzo Farrugia (Stockbrokers).

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